As we move into 2008, WealthBriefing’s final poll of 2007 posed the question: “Which asset class will be the biggest winner next year in clients' portfolios?”

As we move into 2008, WealthBriefing’s final poll of 2007 posed the question: “Which asset class will be the biggest winner next year in clients' portfolios?”

Despite ongoing volatility in financial markets, this year’s poll favours equities as the asset class to watch in 2008 with 48 per cent of the votes, closely followed by cash (20 per cent) and fixed-income (20 per cent). Financial alternatives gather only 12 per cent of votes – and non-financial alternatives and similar allocations to 2007 attract no votes at all.

When the same question was asked a year ago, 31 per cent of respondents said that they thought financial alternatives would be the front runners for 2007, but the poll results were not mirrored by a straw poll of investment professionals, who were most bullish towards equity markets.

Philip Watson from Citi Private Bank, says whilst he anticipates higher volatility, equity markets continue to offer good value in 2008:

“There are a number of factors to support this. Average returns following the Fed rate cut moves are typically strong and valuations at the global level also continue to be compelling.

“2008 has both a US Presidential election and an Olympic games - financial markets tend to do well in years like this”, agrees Jeremy Beckwith from Kleinwort Benson.

Martin O’Hare says that from an overall strategy perspective, SG Hambros has a neutral position to equity markets but believes they will outperform cash next year. As a low-risk asset class, he thinks cash currently has an attractive yield, but as over the next 12 months cash rates are likely to decline, investors will face a dilemma about which asset classes will perform well in a declining interest rate environment:

“We believe equity markets tick that box”, he says. “Whilst volatility remains high, the recent rebound in the markets reflects the fact that markets may have overreacted to events surrounding the US sub prime crisis.”

Fredrik Nerbrand from HSBC Private Bank also expects further volatility in equity markets and therefore favours quality large cap companies, in particular mega caps:

“Our maxim has long been that investors should only take risks where they are adequately rewarded for then at this juncture this seems to be equities.”

Credit Suisse’s private banking business in the UK believes that whilst the overall bull trend will remain intact, globally volatility will increase and corrections may become more frequent.

Whilst being bullish on equities overall, geographically our experts favoured certain equity markets over others. Many of the experts we spoke to were geographically bullish towards Asia. It continues to be HSBC Private Bank’s preferred region along with emerging markets, a view supported by Kleinwort Benson which believes that emerging markets, particularly in Asia would continue to grow strongly:

“We believe that key areas for investment in 2008 are Asia, where economic growth is stronger than any other region. The China Olympics will be a global focus and, despite good performance this year, Asian stocks outside China are not expensive”, says Mr Beckwith.

Andrew Impey, from Singer & Friedlander Investment Management, agrees:

“The continued growth in Asian consumer demand will remain a key catalyst to corporate growth in the region and globally. We believe that global equities still represent the core of a wealthy individual's financial portfolio. With 2008 just around the corner we are looking for corporate balance sheets to be in good shape, with strong cash flows being a key determinant.”

Paul Sarosy from Credit Suisse points to increasing wealth and productivity in Asia opening interesting areas for private client investments as it leads to urbanisation, a consumer base which is more aware of global trends, and changing consumer tastes for food:

“Investments in companies and funds which focus on dairy, fertilisation, farm machinery and meat production therefore provide attractive longer-term investments”, he says.

Mads Pedersen from Barclays Wealth takes the view that recent action by central banks has, if anything, strengthened the case for equities relative to bonds and cash:

“There is likely to be plenty of market volatility in 2008 but we continue to recommend that a balanced portfolio should include a moderate overweight in equities. The larger part of this overweight should be allocated to the relatively inexpensive regions (Europe excluding UK), with a smaller overweight in US and emerging markets. We retain a neutral weighting on Japan.”

Ashok Shah at London & Capital believes European equity markets are going to feel the impact of the US slowdown as well as the appreciation in the euro:

“Nevertheless, we expect robust domestic demand to offset some of these effects. We’re somewhat less optimistic for the UK as the slump in the housing market will have a negative impact on consumption. We expect emerging markets to offer more value than the main developed markets and believe low correlated markets such as the Gulf Co-operation Council region look particularly interesting.”

Despite their strong performance in 2007, Shelley Kuhn from Neptune Investment Management remains positive on Chinese equities going into 2008 and is also bullish on the Indian market:

“We believe that China still represents the most compelling growth story in Asia today, with real GDP expected to remain at over 9 per cent next year, driven largely by investment but is being increasingly supported by strong consumption growth. India remains the most insulated Asian economy in the event of a US or global slowdown.”

However, whilst positive on Asian equities, SG Hambro’s Martin O’Hare sounds a note of caution on Chinese equities:

“We are concerned about the high level of hot money from local investors and consequently, this market could be vulnerable to a sharp correction,” he told WealthBriefing.

Citi Private Bank has a focus on capturing global growth within equities and likes the emerging market growth story:

“We highlight Brazil in this context and believe in spite of its recent run that the Bovespa offers good value from here. Strong economic growth, resource rich, favourable demographics and recent political stability are some of the reasons for our confidence in Brazil as an investment location of choice”, says Mr Watson.

Whilst positive on equities as a whole, our experts are bearish when it comes to the US and global retailing. “Although we believe that the US should step away from the edge, it remains on the edge of a possible recessionary abyss,” says Mr Nerbrand.

London & Capital believes that the US equity market is likely to suffer the most as the full impact of the credit crisis on the economy has yet to feed through, although sentiment will improve as the Fed delivers further rate cuts and valuations become more attractive.

“Consumer stocks overall are likely to feel the brunt of slower economic growth”, says Mr Impey from Singer & Friedlander. “As the expectation for rapid interest rate declines are evaporating, and the levels of consumer debt remains high, we feel this sector should be largely avoided.”

“UK and US house prices show the weakest prospects. Sectors dependent on happy, confident consumers will also struggle”, says Mr Beckwith.

Credit Suisse is "underweight" on the global retailing sector due to a weak US housing market, higher gasoline prices and much tighter lending by banks:

“Avoid over allocating to US consumer sensitive markets”, agrees Mr Watson from Citi. “Whilst we see low probability of a US recession, the US consumer and the consumer discretionary sectors may struggle in a sub trend growth environment. Confidence could be hampered by further house price falls as well as anticipated slower jobs creation.”

However, contrary to our poll, London and Capital believes that the outlook for government bond markets remains positive into 2008 as uncertainty surrounding financials keeps fuelling the flight to safety:

“Top quality ‘AAA’ rated bonds issued by government agencies and supranationals are currently trading at spreads over government bonds not seen in years and offer excellent lock-in value”, says Mr Shah.

HSBC Private Bank thinks that fixed income as an asset class continues to look expensive. Mr Nerbrand’s view is that there are significant opportunities for particular styles of hedge funds:

“We believe properly diversified hedge fund portfolios should continue to deliver attractive risk adjusted returns over the medium and long term.”

This view is shared by Mr Pedersen from Barclays Wealth who believes that the areas of most interest lie in absolute return strategies:

“Hedge fund strategies are still a good long term bet as part of overarching diversification strategies for investment portfolios.”

“We have recently increased our allocation to alternative investments as we believe the current market environment is attractive for hedge funds and recent hedge fund returns have been positive during this recent period of heightened market volatility”, says Mr O’Hare.

Structured products are also set to play a key role in client portfolios:

“Whilst wealthy investors aim to achieve attractive investment returns, preservation of capital is often of equal importance. Structured products meet that criteria in that they can provide investors with exposure to risky assets but with capital protection. This strategy works well to play thematic trends such as the commodities sector where there is positive momentum yet a high level of volatility,” continues Mr O’ Hare:

“We prefer large caps in the UK to mid caps for a number of reasons and have been offering a note with a payout related to the excess returns of the FTSE 100 over the FTSE 250”, concludes Mr Watson.